Originally published by Gordon Orr on LinkedIn: China Forecasts 2017 (#6): Where Has the Money Gone?
This year will see a continuation of the great “game of chicken” between those in government trying to manage down China’s exchange rate and investors who want to diversify and protect the US dollar value of at least part of their asset base.
After a lull through mid-2016, we are back in a situation where the government has created in the mind of investors the expectation of continuous slow depreciation—and now feels it has to act aggressively to stop investors from taking advantage of what they see as a one-way bet.
China’s government is constantly looking to shut down leakage points, but is often challenged by its own conflicting objectives. Well over $100 billion has left China this year for international acquisitions by Chinese businesses, with many acquirers paying over the odds in order to get their money out of the country. This is despite the State Administration of Foreign Exchange frequently declining to approve renminbi conversions for deals in a timely fashion.
As a further step, the Ministry of Commerce and the National Development and Reform Commission announced plans in late November to implement stricter controls on any overseas investment above $10 billion, on state-owned enterprises (SOEs) that invest more than $1 billion in real estate, and on any companies investing more than $1 billion in non-core businesses. This makes transactions harder, but not insurmountably harder for private industrial investors as most transactions are below $10 billion and in their core businesses. Turning off the tap entirely would be totally inconsistent with major government initiatives such as One Belt, One Road and China Going Global.
Further restricting the use of credit cards on the estimated 140 million overseas trips made by Chinese travelers in 2015 is possible but would annoy these middle-class travelers (a large number of whom are also Party members) and have them looking for another mechanism to spend abroad (travelers checks remain alive and well). As an example, it’s been very popular in 2016 to visit Hong Kong, buy single premium life insurance policies (with a value of up to $100 million!) using renminbi, and then use a variety of means to monetize the policy in US dollars. The credit-card squeeze has clamped down on this and, in case that wasn’t enough, by having a quiet word with insurers to suggest they don’t prioritize these products any more.
In business, the government is investigating over-invoicing as a means of turning local currency into dollars, clamping down on the use of free-trade zones to move money out of China, and investigating transfer-pricing arrangements between the domestic and overseas arms of corporations. Some large and midsize multinationals who have never reported profits in China have recently been asked for up to ten years of transfer pricing data. Yet in an economy as large and as open to trade and travel as China is today, there will always be new methods emerging.